Yes Bank crisis and its domino effect on bonds, mutual funds and other corporate defaults

The temporary crunch will result in systemic risk until the moratorium is resolved according to expertsBCCL

The Yes Bank crisis could have a cascading effect on the stock markets.

Businesses with deposit accounts at Yes Bank may not be able to make payments on loans taken from other financial institutions.

Mutual funds have a total exposure of ₹2,848 crore, and most are already side-pocketing the risk.

As the Yes Bank crisis continues to unfold, not everyone is on board with the Reserve Bank of India’s (RBI) scheme to restructure the troubled bank. Mutual funds stand to lose millions and the moratorium limiting withdrawals to ₹50,000 could spell trouble for companies who are using the bank’s services.

“With large-sized withdrawals disallowed, a number of companies availing of facilities from Yes Bank could face disruption in their operations, which may constrain their ability to service financial obligations on time,” said global rating firm CRISIL in a statement.

As the fourth largest private sector bank in the country, Yes Bank has an asset book of more than ₹3.45 crore and deposits exceeding ₹2 lakh crore. CRISIL believes that the moratorium has “material implications” for companies using Yes Bank for loans, deposits, bonds and other instruments.

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How Yes Bank crisis could affect other banksThe fall out from funds being stuck at the troubled bank could result in companies defaulting on their loans from other financial institutions since their payments are linked to deposit accounts at Yes Bank. It may further aggravate liquidity issues for the already cash-starved non-banking lenders, according to a report by Fitch Ratings.

“There could also be a marginal uptick in delinquencies in retail loans of banks and non-banks,” said CRISIL.

Companies using Yes Bank’s letters of credit and bank guarantees to leverage their businesses may also have to rethink their plans.

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“There are also some securitisation transactions of other originators where Yes Bank is a counterparty - either as the bank where credit enhancement in the form of fixed deposits is being maintained, or as the collection and paying agent for the transaction,” said CRISIL.

NSE Clearing (NCL) and India Clearing Corporation (ICCL), the biggest clearing firms in the country, have told members that any existing benefit toward bank guarantees and fixed deposit receipts issued by Yes Bank were to be squared off by Wednesday, March 11.

“The RBI decision has a cascading effect on trading members and their clients at large since they may not be able to cover their positions from their own funds,” Association of National Exchanges (ANMI) president Vijay Bhushan told ET.

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Bonding over bondsNearly 32 mutual funds are exposed to Yes Bank’s debt with a total exposure of ₹2,848 crore. Many of them are AT 1 (Additional 1) bonds, set to be written off completely. Mutual funds owned by Nippon, Kotak, and Franklin have the most to lose.

Mutual fund owners with the most to lose from RBI’s scheme to restructure Yes Bank:

Mutual fund

Loss

Nippon Mutual Fund

₹2,500 crore

Franklin Mutual Fund

₹590 crore

Barclays Bank

₹246 crore

Kotak Mutual Fund

₹130 crore

Reliance Industries

₹100 crore

Nippon India Mutual Fund, which has the largest exposure, was the first to side-pocket the risk. The move prevents distressed assets, like Yes Bank, from damaging returns generated from better-performing assets. PGIM India Mutual Fund, UTI Mutual Fund, Franklin Templeton Mutual Fund and Baroda Mutual Fund soon followed suit.Advertisement

Axis Trustee Services, on the other hand, filed a petition to delay any action until its bond investors have had the time to review its impact. It asks the court to give enough time for bond investors to review the proposed plan.

Axis Trustee Services Ltd, a debenture trustee of #Yes_Bank , on Monday petitioned the Bombay High Court against th… https://t.co/pE53lzxTwl

According to Axis, the proposal to write off the value of over ₹8,000 AT-1 bonds is unjustified and goes against global best practices. It argues that the scheme put forth by the RBI gives preference to Yes Bank promoters despite their shady record and mismanagement of resources — which landed the bank in hot water, to begin with.

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The possibility of the moratorium being cut shortThe proposed restructuring of Yes Bank includes recapitalisation of ₹20,000 crore with equity contribution and bulk deposits of around ₹30,000 crore by multiple-state owned banks.

“If equity commitments are in place and CD funds flow in, the moratorium may be lifted by the end of the week,” RBI administrator of Yes Bank told reporters on March 10.

CRISIL believes that the challenges in the face of the Yes Bank crisis are likely to be temporary, since they are a direct result of a crunch in liquidity and cash flow. Nonetheless, the temporary crunch will result in systemic risk until the moratorium is resolved — like the cost of borrowing and capital-raising becoming tougher for other banks

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Sources told ET that RBI is checking with Yes Bank’s auditor — BSR &Co, which is a part of KPMG India — whether or not the proposal for SBI to buy a stake in Yes Bank will have any “material impact” on the existing accounts with the bank.

Another one bites the dustThe repeated incidents of large — supposedly ‘too big to fail’ — companies are becoming increasingly rampant. Last September, the Mumbai-based Punjab and Maharashtra Cooperation (PMC) Bank faced a similar crisis. It was placed under an RBI administrator for six months after under-reporting of loans going bad.

However, banks aren’t the only ones going down. The collapse of Jet Airways and Cox & Kings left many investors — and travelers — stranded. Even stockholders in IL&FS and DHFL saw their money disappear overnight due to mismanagement, fraud and corruption within the companies.

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More than just getting Yes Bank on its feet, the central government and the RBI will have to address the trust deficit that now plagues the market.